How do student loans work?

Student loans are borrowed money you must repay with interest. Federal loans come from the U.S. government and offer fixed rates, income-driven repayment, and forgiveness programs. Always exhaust federal aid before considering private loans.

The basics: borrowing, interest, and repayment

When you take out a student loan, a lender disburses funds to your school for tuition and fees; you receive any remaining balance. The loan accrues interest, and you repay principal and interest — typically beginning six months after you graduate, leave school, or drop below half-time enrollment (your grace period).

Subsidized vs. unsubsidized federal loans

Direct Subsidized Loans: For undergraduates with financial need. The government pays interest while you're enrolled at least half-time, during your grace period, and during deferment — so your balance doesn't grow during school.
Direct Unsubsidized Loans: For undergraduates and graduate students regardless of need. Interest accrues from disbursement; if unpaid, it capitalizes (adds to principal) when repayment begins.
Rule of thumb: Accept subsidized loans first, then unsubsidized if you still need aid.

How interest accrual works

Federal student loan rates are fixed for the life of the loan and set by Congress annually. On subsidized loans the government covers interest during in-school and grace periods; on unsubsidized loans interest accrues from disbursement and capitalizes if unpaid at graduation. See current rates at StudentAid.gov.

Repayment after school

Federal loans enter a six-month grace period after you graduate or drop below half-time. After that you're placed on the Standard Repayment Plan (fixed payments over 10 years) by default, but can switch to income-driven, graduated, or extended repayment for free via StudentAid.gov.

By the numbers

Direct Subsidized and Unsubsidized Loans both carry a six-month grace period before repayment begins after leaving school. — Federal Student Aid
On a Direct Unsubsidized Loan, interest accrues from the first disbursement — including during school, the grace period, and deferment. — Federal Student Aid
The Standard Repayment Plan spreads federal loan payments over 10 years; borrowers may switch plans at any time. — Federal Student Aid — Repayment Plans

Key takeaways

Student loans must be repaid with interest — they are not grants.
Subsidized loans don't accrue interest while you're in school; unsubsidized loans do.
Accept subsidized loans first, then unsubsidized if you still need aid.
Always exhaust federal loan options before considering private student loans.